As a freelancer in the creative industries, you’re not only an artist, designer, or writer, but you’re also a business owner. You have to navigate the world of taxes much like any other company would, and that can be daunting. But don’t worry. In this article, we’ll help you understand the basics of tax planning and give you practical strategies to manage your tax obligations.
Understanding Your Tax Obligations
Before we delve into the heart of tax strategies for freelancers, it’s crucial for you to understand your tax obligations. Freelancers in the UK are considered self-employed and are expected to submit a yearly Self Assessment tax return to HMRC. Your personal income tax will depend on your earnings for the tax year. You’re also required to pay National Insurance Contributions to qualify for certain benefits, like the State Pension.
As a freelancer, you also have the benefit of deducting allowable expenses from your income before calculating your taxable profit. However, these expenses must be exclusively for your business. Examples include advertising costs, office expenses, and travel costs related to your business.
Enlisting the Help of a Professional Accountant
Tax planning can be overwhelming, especially if you’re not familiar with the financial jargon and tax laws. Hiring a professional accountant can be a worthwhile investment. They have a comprehensive understanding of the tax system and can guide you on the best tax-saving strategies. They’ll ensure you take advantage of all allowable deductions and prevent you from making costly mistakes on your tax returns.
A professional accountant will also help you understand the implications of various financial decisions on your tax liabilities. This can be particularly beneficial if your freelance work is unstable, as it often is in the creative industries. They can advise you on managing your income and expenses efficiently to optimize your tax position.
Making the Most of Your Allowable Expenses
The key to reducing your tax liability is making the most of your allowable expenses. As mentioned earlier, the costs that are exclusively for your business can be deducted from your income before you calculate your taxable profits.
Some common allowable expenses include office costs (like phone bills and stationery), travel costs (fuel, parking, train or bus fares), advertising or marketing (website costs), financial costs (insurance or bank charges), and costs of your business premises (heating, lighting, business rates). Make sure to keep records of these expenses to provide evidence if HMRC asks for it.
You can also claim the cost of buying equipment, machinery, or business vehicles as capital allowances. If you work from home, you can claim a proportion of your costs for things like heating, electricity, Council Tax, mortgage interest or rent, internet, and telephone use.
The Importance of Saving for Your Tax Bill
It’s essential to understand that the money you earn as a freelancer isn’t entirely yours. A portion of it will go towards taxes. For this reason, it’s wise to set aside a percentage of your income throughout the year for your tax bill.
The percentage you save will depend on your income. As a rough guide, it’s a good idea to save about 20-30% of your earnings. This might seem like a big chunk, but bear in mind that your tax bill will also include your National Insurance Contributions.
Setting money aside will ease the burden when your tax bill arrives, and it will help you avoid any late payment penalties. You can open a separate savings account for your tax money to avoid spending it accidentally.
Using the Creative Industry Tax Reliefs
The UK government has introduced various Creative Industry Tax Reliefs to encourage growth in the creative sector. These reliefs allow companies to claim a larger deduction, or in some cases receive a cash payment, when calculating their taxable profits.
There are eight reliefs available, each aimed at a specific sector: Film Tax Relief, Animation Tax Relief, High-end Television Tax Relief, Video Games Tax Relief, Children’s Television Tax Relief, Theatre Tax Relief, Orchestra Tax Relief, and Museums and Galleries Exhibition Tax Relief.
As a freelancer in the creative sector, if you set up a limited company, you may be eligible to claim one or more of these tax reliefs. However, the process can be complex, and it’s recommended to seek professional advice before making a claim.
Overall, navigating tax planning as a freelancer in the creative industries can be complex but understanding the basics, enlisting the help of a professional, and utilizing the available resources can help you manage your taxes effectively. Remember, a well-organized and strategic approach to your taxes will not only save you time and stress but also money in the long run.
Choosing the Right Business Structure for Your Creative Business
In the UK, freelancers typically operate as a sole trader or a limited company. Your choice of business structure will significantly impact your tax planning strategy. Consider working with a professional accountant to determine which one is most beneficial for you.
As a sole trader, you’re running your business as an individual. This means that you’re personally responsible for your business’s debts. You’ll pay tax on your profits through the Self Assessment tax return process. If your annual revenue is above the VAT threshold, currently £85,000, you’ll also need to register for VAT.
Being a sole trader is relatively straightforward in terms of administration. However, your personal and business affairs are not separate, which means you could be personally liable if your business runs into trouble.
On the other hand, a limited company is a separate legal entity from you. This separates your personal assets from your business. As a director, you’ll pay income tax on your salary and dividends. The company will also pay Corporation Tax on its profits.
Running a limited company involves more administration and reporting requirements. However, it can be more tax-efficient, especially if you’re earning a higher income. It also gives you the opportunity to claim the Creative Industry Tax Reliefs.
Managing Intellectual Property and Income Tax
In the creative industries, understanding how to manage and protect your intellectual property (IP) is essential. IP refers to creations of the mind, like inventions, literary and artistic works, designs, symbols, names, and images used in commerce.
As a freelancer, you generate IP through your creative work. This can be a valuable asset, and it’s important to include it in your tax planning. Depending on the nature of your IP, you may receive income through licensing or selling your IP rights. This income is subject to tax, and you should include it in your Self Assessment tax return.
How you manage your IP can also impact your tax bill. For example, if you operate as a limited company, you can transfer your IP to the company. Your company can then claim tax relief on the costs of developing these assets. This can be a complex area, and it’s recommended to seek professional advice to optimise your tax position.
Conclusion: Embracing Technology to Simplify Tax Planning
To efficiently manage your tax obligations, consider using accounting software. It can help you track your income, expenses, and invoices, making it easier to complete your tax return. It also enables you to keep a record of your business transactions, which you must maintain for at least five years after the tax year.
In the creative industries, you’re often juggling multiple projects and deadlines. Leveraging technology can make tax planning less time-consuming, allowing you to focus more on your creative work.
Remember, tax planning is not about avoiding paying tax. It’s about understanding the UK tax system, and your obligations and options within it. With the right strategies, you can minimise your tax liability, protect your income, and ensure your creative business thrives.
Whether you’re a sole trader or running a limited company, tax planning is an essential part of your business. From understanding your tax obligations, making the most of your allowable expenses, saving for your tax bill, making use of tax reliefs, to managing your intellectual property, there’s a lot to consider. But with careful planning, professional advice, and efficient systems, you can navigate the tax landscape with confidence.
